PPP Loans and Changes in Ownership

The Small Business Administration (SBA) issued a procedural notice effective October 2, 2020 for businesses that previously received a Paycheck Protection Program (PPP) loan that have a change in their ownership.

The SBA defines a “change in ownership” for purposes of PPP when any of the following take place in one or more transactions:

1. At least 20% of the common stock or other ownership interest of a PPP borrower is sold or otherwise transferred, including to an affiliate or an existing owner of the entity;
2. The PPP borrower sells or otherwise transfers at least 50% of the fair market value of its assets; or
3. A PPP borrower merges with or into another entity

The notice defines procedures PPP borrowers must follow if they have a change in ownership.  Prior to closing any change in ownership transactions, the PPP borrower is required to notify the PPP lender in writing of the contemplated transaction and provide the lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction.

If the PPP note is fully satisfied prior to the closing of the sale or transfer, there are not any restrictions on the change in ownership.  A note is considered fully satisfied in the eyes of the SBA if either:

1. The PPP note is repaid in full; or
2. The loan forgiveness process has been fully completed and:
   1. The SBA has remitted the funds to the lender in full satisfaction of the note; or
   2. The PPP borrower has prepaid any remaining balance on the PPP loan.

If the change in ownership is structured as a sale or other transfer of common stock or other ownership interest, or as a merger, and if the PPP note is not fully satisfied prior to closing the sale or transfer, the PPP lender may approve the change in ownership without the SBA’s prior approval if:

1. The sale or other transfer is 50% or less of the common stock or other ownership interest of the PPP borrower taking into consideration all sales or transfers occurring since the PPP loan’s approval date; or
2. The PPP borrower:
   1. Completes and submits a forgiveness application along with the required supporting documentation to the PPP lender;
   2. Establishes an interest-bearing escrow account controlled by the PPP lender with funds equal to the outstanding balance of the PPP loan; and
   3. Upon the completion of the forgiveness process (including any appeal of the SBA’s decision) must first use any escrowed funds to fully repay any remaining PPP loan balance plus interest.

If the change in ownership is structured as a sale of 50% or more of the fair market value of its assets, and if the PPP note is not fully satisfied prior to closing the sale or transfer, the PPP lender may approve the change in ownership without the SBA’s prior approval if the PPP borrower:

1. Completes and submits a forgiveness application along with the required supporting documentation to the PPP lender;
2. Establishes an interest-bearing escrow account controlled by the PPP lender with funds equal to the outstanding balance of the PPP loan; and
3. Upon the completion of the forgiveness process (including any appeal of the SBA’s decision) must first use any escrowed funds to fully repay any remaining PPP loan balance plus interest.

In all other cases, prior SBA approval of the change in ownership will be required and the PPP lender alone may not approve of the change.

If the SBA’s approval is required, the PPP lender must submit the request to the appropriate SBA Loan Servicing Center and include:

1. The reason why the PPP loan cannot be fully satisfied, or the funds escrowed;
2. Details of the proposed transaction;
3. Copy of the executed PPP note;
4. Any letter of intent and the purchase or sale agreement that defines the responsibilities of the PPP borrower, seller (if different from the PPP borrower), and buyer;
5. The buyer’s SBA loan number if it has a PPP loan; and
6. A list of all owners of 20% or more of the purchasing entity.

SBA will review and provide a determination within 60 calendar days of receipt of a complete request and may require additional mitigation measures as a condition of its approval of the transaction.

When the sale is structured to be the sale of 50% or more of the fair market value of the assets, SBA approval will be conditioned on the buyer assuming all the PPP borrower’s obligations of the PPP loan.  The purchase or sale agreement must include appropriate language regarding the assumption of the PPP loan by the buyer, or a separate assumption agreement must be submitted to the SBA.

For all other ownership changes structured as a sale or other transfer of common stock or other ownership interest, or as a merger, the PPP borrower will remain subject to all obligations under the PPP loan regardless of whether SBA approval is necessary.  If there is any unauthorized use of PPP funds by the new owners, the SBA will have recourse against the owners.

If any of the new owners or successors has a separate PPP loan:

1. In a merger, the successor is responsible for segregating and delineating PPP funds and expenses to demonstrate compliance with PPP requirements with respect to both PPP loans
2. In a sale or other transfer of common stock or other ownership interest, the PPP borrower and new owner(s) are responsible for segregating and delineating PPP funds and expenses to demonstrate compliance with PPP requirements for each borrower.

Your trusted advisors at BerganKDV will continue to monitor the legislation and will keep you informed on the provisions impacting businesses and individuals in addition to the PPP.  Please reach out to discuss strategies to ensure your business is making the right decisions as changes continue to be made to this program. Contact Our Team.

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